bank rating methodology - moody's

Bank Rating Methodology

MARCH 2015

Overview

Bank Rating Methodology, 2015 2

Agenda

1. Overview

2. Baseline Credit Assessment (BCA) Structure

3. Support and Structural Analysis

Bank Rating Methodology, 2015

Overview 1


Methodology highlights

Changes to our methodology responds to fundamental changes in the industry.

4

» Initiation of a “Loss Given Failure” component to our analysis

― Distinguishes loss severity by individual creditor classes for banks subject to resolution

― Recognises that deposits may be preferred to senior unsecured debt in resolution

» Baseline Credit Assessment (BCA) structured around a new single global Scorecard

― Fully integrates key financial metrics and analytical judgments

― BFSRs to be withdrawn

» BCA Scorecard focussed on five financial factors, supported by five financial metrics

― Backtesting has shown these to be strongly predictive of failure or the need for support

― Analysts and rating committees to consider additional ratios as relevant for each institution

― Forward-looking scenario analysis incorporated directly into the financial ratios that drive the

Scorecard

» Introduction of a ‘Macro Profile’ integrating system-level pressures into our analysis

― Produced with Sovereign Risk Group, based on macro-economic and financial indicators

― Each financial factor scored as a function of both a financial ratio and the Macro Profile

Overview | Baseline Credit Assessment Structure | Support and Structural Analysis


Key feedback

5

» Overall

- Generally positive reception to increased clarity over structure

- Comments on transparency / complexity

» BCA

- Recognition of value of Macro Profile albeit some concern over “double counting”

- Alternatives or modifications to key ratios suggested

- Role of stress testing and forecasts

» LGF

- Concept universally welcomed

- Questions on relative weight of subordination and instrument volume

- Restricted application to Operational Resolution Regimes generally accepted

- Differing views on De Jure / De Facto probabilities and resolution perimeter under SRM

- Some challenge to loss rate assumptions

» Government support

- No significant issues raised

88 formal responses of which 20 are public



Changes relative to RFC

6

Some modifications in response to feedback, mainly in respect of LGF

» BCA

- Some modifications to Macro Profile construction

- More explicit recognition of collateral and provisions in Asset Risk score

- More discriminating Capital scoring scale

» Advanced LGF (for banks in Operational Resolution Regimes)

- Loss rates expressed as a % of assets not liabilities

- Residual equity included within the waterfall and may be varied

- Notching tables re-designed to ensure a unit of subordination is always at least as beneficial as a

unit of pari passu debt

- Probability of “de facto” junior deposit preference in the EU reduced to 25% from 50%

» Counterparty Risk Assessment

- New indicator introduced to speak to probability of default on operating obligations

» Impact

- More BCA movement than at time of RFC but generally balanced

- In the EU, uplift to deposit ratings slightly lower due to reduced probability of de facto waterfall;

senior unsecured uplift modestly higher



Key Changes

7

Introduction of Loss Given Failure component responds to new resolution regimes.

» Combines parent and

cooperative group

support

» Advanced LGF approach to

notching up or down debt and

deposits of banks in systems

with ‘Operational Resolution

Regimes’ (e.g., EU and US) by:

− Size of loss (resolution type)

− Amount of subordination

− Size of debt class

» Notching based on “waterfall”

analysis of post-failure balance

sheet in resolution

» Outside of these regimes, we

employ a basic LGF notching

based on instrument type

» Adds support at the

instrument class level

» Government

creditworthiness

determined by the local

government bond rating

» Captures bank’s

operating environment

with addition of Macro

Profile

» Simplified Scorecard:

− Incorporates forecasts

− Quantifies our credit

judgments within

scorecard

− Different financial

ratios used to capture

bank’s liquidity and

solvency

KE

Y C

HA

NG

ES



Rating Structure

8

BFSR has been retired and replaced with BCA



Introduction of a Counterparty Risk Assessment (CRA)

9

» The CR Assessment being introduced with the methodology will represent our opinion of the relative

likelihood of default of various senior operating obligations and other contractual commitments that are

less likely to be subject to bail-in or the application of other resolution tools, to ensure the continuity of

operations

» This reflects authorities’ goals of preserving key operations and flow of payments to limit any potential

market disruptions and contagion

» The CR Assessment is distinct from debt, deposit or issuer ratings in that it measures default

probability rather than expected loss, and applies to counterparty obligations and contractual

commitments, which may be preserved even when a bank has entered a resolution process, rather

than debt or deposit instruments

» The CR Assessment will be positioned relative to the adjusted BCA – also a measure of default

probability and our opinion of issuers’ standalone intrinsic strength – and incorporate government

support where applicable

» The CR Assessment will serve as a reference point in structured and public finance transactions

» The CR Assessment is an input to credit ratings and not a final credit rating. This is denoted by a (cr)

modifier, e.g. Baa2 (cr)

» We expect to assign CRAs in the coming months. Timing will be aligned with closing of reviews where

applicable

CRA speaks to probability of default on operational obligations



Baseline Credit Assessment Structure 2


Our bank BCAs describe the probability of a bank defaulting on any of its rated

instruments, in the absence of external support. There are three stages to the BCA

analysis: a ‘Macro Profile’ reflecting system risks, the Financial Profile, incorporating key

metrics, and additional Qualitative Factors.

BCA Structure

11



Macro Profile

Macro Profile builds on three components from our sovereign scorecard, and three banking

components. Credit Conditions factor gains more weight as metrics deteriorate.

Sovereign Component Banking Component KEY:

** Excluding adjustment

related to track record of

sovereign default

*** Excluding banking factors

1

Credit

Conditions

3

Susceptibility

to Event Risk***

2

Institutional

Strength **

1

Economic

Strength *

Banking System

Macro Profile

Banking Country Risk Industry

Structure

3

Funding

Conditions

2

* Excluding adjustment

related to “credit boom”



Macro Profile Rank Ordering

Macro Profiles for selected systems (March 2015).

Se

lecte

d M

acro

Pro

file

Ran

k O

rde

rin

g

CountryBanking Country Risk

as of 13 August 2014

Credit

Conditions

Funding

Conditions

Industry

Structure

Banking System

Macro Profile

Australia Aaa - Aa2 Neutral -1 1 Very Strong

Canada Aaa - Aa2 Weak 0 1 Very Strong -

France Aaa - Aa2 Neutral -1 0 Very Strong -

Germany Aaa - Aa2 Neutral 0 -1 Very Strong -

United Kingdom Aaa - Aa2 Neutral 0 -1 Very Strong -

United States Aaa - Aa2 Weak + 1 -1 Very Strong -

Japan Aa1 - Aa3 Weak 0 0 Strong +

Korea Aa1 - Aa3 Weak + -1 0 Strong +

Mexico A1 - A3 Neutral 0 0 Strong

Saudi Arabia Aa3 - A2 Weak + 0 0 Strong

Brazil A2 - Baa1 Weak + 0 0 Strong -

China A1 - A3 Weak - 0 0 Moderate +

Italy A1 - A3 Weak -1 0 Moderate +

South Africa A2 - Baa1 Weak + -1 0 Moderate +

Spain A1 - A3 Weak -1 0 Moderate +

India Baa1 - Baa3 Neutral 0 -1 Moderate

Indonesia Baa2 - Ba1 Neutral 0 0 Moderate

Turkey A3 - Baa2 Weak 0 0 Moderate

Russia Baa3 - Ba2 Neutral 0 0 Moderate -

Kazakhstan Baa3 - Ba2 Neutral 0 -1 Weak +

Azerbaijan B1 - B3 Neutral 0 0 Weak -

Argentina B3 - Caa2 Weak 0 0 Very Weak +

Egypt B2 - Caa1 Very Weak + -1 0 Very Weak

Cyprus Baa2 - Ba1 Very Weak -3 0 Very Weak -

Ukraine Caa2 - C Weak + 0 0 Very Weak -

Country Banking Country

Risk Credit Conditions

Funding

Conditions Industry Structure Macro Profile

AUSTRALIA Very Strong 0 -1 1 Very Strong

CANADA Very Strong -2 0 1 Very Strong -

FRANCE Very Strong 0 -1 0 Very Strong -

GERMANY Very Strong 0 0 -1 Very Strong -

UNITED KINGDOM Very Strong -1 0 0 Very Strong -

UNITED STATES Very Strong -1 1 -1 Very Strong -

JAPAN Very Strong - -1 0 0 Strong +

KOREA Very Strong - 0 0 -1 Strong +

MEXICO Strong -1 0 0 Strong -

SAUDI ARABIA Strong -1 0 0 Strong -

BRAZIL Strong - 0 0 -1 Moderate +

CHINA Strong -2 0 0 Moderate +

ITALY Strong + -2 -1 0 Moderate +

SPAIN Strong -2 0 0 Moderate +

INDIA Moderate + 0 0 -1 Moderate

INDONESIA Moderate 0 0 0 Moderate

SOUTH AFRICA Strong - -1 -1 0 Moderate

TURKEY Strong - -2 0 0 Moderate

KAZAKHSTAN Moderate - 0 0 -1 Weak +

RUSSIA Weak + 0 0 0 Weak +

AZERBAIJAN Weak - 0 0 0 Weak -

ARGENTINA Very Weak + 0 0 -1 Very Weak

CYPRUS Strong - -5 -3 0 Very Weak

EGYPT Weak -2 -1 0 Very Weak

UKRAINE Very Weak - 0 -1 0 Very Weak -



Example BCA Scorecard: Macro Profile

Macro Profile determines the relationship between financial ratios and unadjusted scores.

Example Scorecard:

Baseline Credit Assessment Banking Group ABC Inc

Country XYZ

Macro Factors 2 3 4

Country /

RegionMacro Profile Weight

Country 1 Country 1 Very Strong 60%

Country 2 Country 2 Strong 20%

Country 3 Country 3 Moderate + 20%

Weighted Macro Profile Strong + 100%



Financial Factors

15

Our assessment of a bank’s financial profile is structured around key risks and their mitigants.



Each financial factor is informed by a single ratio

16

Each ratio is scored on a global scale before integration of Macro Profile

VS+ VS VS- S+ S S- M+ M M- W+ W W- VW+ VW VW-

Asset Risk <= <= <= <= <= <= <= <= <= <= <= <= <= <= >Problem Loans / Gross Loans 0.5% 0.75% 1.0% 1.5% 2.0% 3.0% 4.0% 5.0% 6.0% 8.0% 10.0% 15.0% 20.0% 25.0% 25.0%

Capital >= >= >= >= >= >= >= >= >= >= >= >= >= >= <TCE / RWAs(Basel I) 19.7% 17.7% 15.8% 14.8% 13.8% 12.8% 11.8% 10.8% 9.9% 8.9% 7.9% 6.9% 5.9% 4.9% 4.9%TCE / RWAs(Basel II) 20.7% 18.6% 16.6% 15.5% 14.5% 13.5% 12.4% 11.4% 10.4% 9.3% 8.3% 7.2% 6.2% 5.2% 5.2%TCE / RWAs(Basel III) 20.0% 18.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 5.0%

Profitability >= >= >= >= >= >= >= >= >= >= >= >= >= >= <

Net income / tangible assets (%) 2.5% 2.25% 2.0% 1.75% 1.5% 1.25% 1.0% 0.75% 0.5% 0.375% 0.25% 0.125% 0.0% -1.0% -1.0%

Funding Structure <= <= <= <= <= <= <= <= <= <= <= <= <= <= >Market funds / Tangible Banking Assets 2.5% 3.75% 5.0% 7.5% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 50.0% 60.0% 70.0% 70.0%

Liquid Resources >= >= >= >= >= >= >= >= >= >= >= >= >= >= <Liquid Assets / Tangible Banking Assets 70.0% 60.0% 50.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 7.5% 5.0% 3.75% 2.5% 2.5%



VS+ VS VS- S+ S S- M+ M M- W+ W W- VW+ VW VW-

VS+ aaa aaa aa1 aa1 aa2 aa3 a1 a3 baa1 baa2 ba1 ba3 b2 caa1 caa3

VS aaa aa1 aa1 aa2 aa3 a1 a2 a3 baa1 baa3 ba1 ba3 b2 caa1 caa3

VS- aa1 aa1 aa2 aa2 aa3 a1 a2 baa1 baa2 baa3 ba2 b1 b2 caa1 caa3

S+ aa1 aa2 aa2 aa3 a1 a2 a3 baa1 baa2 ba1 ba2 b1 b3 caa1 caa3

S aa2 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba3 b1 b3 caa1 caa3

S- aa3 aa3 a1 a2 a3 a3 baa2 baa3 ba1 ba2 ba3 b2 b3 caa2 caa3

M+ a1 a1 a2 a3 a3 baa1 baa2 baa3 ba2 ba3 b1 b2 b3 caa2 caa3

M a2 a2 a3 baa1 baa1 baa2 baa3 ba1 ba2 ba3 b1 b3 caa1 caa2 caa3

M- a3 a3 baa1 baa2 baa3 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3

W+ baa1 baa2 baa2 baa3 ba1 ba2 ba2 ba3 b1 b2 b3 b3 caa1 caa2 caa3

W baa2 baa3 ba1 ba1 ba2 ba3 ba3 b1 b2 b3 b3 caa1 caa2 caa2 caa3

W- baa3 ba1 ba2 ba3 ba3 b1 b2 b2 b3 b3 caa1 caa1 caa2 caa2 caa3

VW+ ba1 ba3 ba3 b1 b2 b2 b3 b3 caa1 caa1 caa2 caa2 caa2 caa3 caa3

VW ba3 b1 b2 b3 b3 caa1 caa1 caa1 caa2 caa2 caa2 caa2 caa3 caa3 caa3

VW- b1 b3 caa1 caa1 caa2 caa2 caa2 caa3 caa3 caa3 caa3 caa3 caa3 caa3 caa3

Financial Ratio

Mac

ro P

rofi

le

Initial scores result from Macro Profiles + financial ratios

Rating of banks in weak systems are less sensitive to their individual financial metrics and

more reflective of changes in the macro environment.

17

Example: Bank’s Financial Ratio Country’s Macro Profile Initial Score

Bank in Country 1 Moderate Strong baa2

Bank in Country 2 Moderate Weak b1

VERY

STRONG + VERY

WEAK -



Financial Profile 5 6 7 10 11

Historic Ratio Initial ScoreExpected

trend

Assigned

ScoreKey driver #1 Key driver #2

Solvency

Asset Risk

Problem Loans / Gross Loans 2.0% a1 ↓↓ baa2Geographical

concentrationCapital market risk

Capital

Tanigble Common Equity / RWA 8.5% ba2 ↔ b1Risk-weighted

capitalisationNominal leverage

Profitability

Net Income / Tangible Assets 0.5% baa2 ↔ a3 Earnings quality

Combined Solvency Score baa3

Liquidity

Funding Structure

Market Funds / Tangible Banking Assets 15.0% a2 ↔ baa2 Term structure

Liquid Resources

Liquid Banking Assets / Tangible Banking

Assets20.0% baa1 ↑ baa1 Expected trend Intragroup restrictions

Combined Liquidity Score a3 baa2

Financial Profilebaa3

18

Example BCA Scorecard: Financial Profile

Assigned score incorporates forward-looking expectations, auxiliary ratios, qualitative aspects

& stress scenarios.

Example Scorecard: Example Scorecard: Qualitative

factors quantified

Financial

factors

Score

incorporating

Macro Profile



Qualitative Factors

We may adjust our initial BCA score by one or more notches if we judge any of these

factors has a material bearing on the bank’s overall risk profile.

Gauges a bank’s sensitivity to

deterioration in a single

business line.

+ Positive adjustments

E.g. a one-notch increase for a firm

with a diverse range of business

activities that provide an overall

reliable earnings stream, or the

stability provided by an entrenched

and state-protected franchise

- Negative adjustments

E.g. a one-notch decrease for a

bank which derives more than

about three-quarters of its revenues

or earnings from a single business

line.

1

Business

diversification

2

Opacity and

complexity

3

Corporate

behavior

An institution’s riskiness increases

with its complexity, other things

being equal.


None.


E.g. a one-notch decrease (or more in

extreme cases) if a bank has numerous

business lines across many

geographies and legal entities,

significant exposure to derivatives,

complex legal structure, large, complex

and / or long-dated exposures to other

financial institutions.

A bank’s creditworthiness can be

influenced by what we term its

“corporate behavior”, which can also

signal other concerns.


E.g. sustained exemplary stewardship

over time with tangible impact on the

risk profile


One or more notch decreases

considering the following factors: key

man risk, insider and related party risks,

strategy and management, dividend

policy, and compensation policy.



Financial Profilebaa3

Qualitative Adjustments Adjustment

Business Diversification 0

Opacity and Complexity -1

Corporate Behavior 0

Total Qualitative Adjustments -1

Sovereign or Affiliate constraint Aaa

BCA range baa3 - ba2

Assigned BCA ba1

Rationale

Appropriate position vs peers

Comment

Highly complex organisation

Comment

Government rating

Example BCA Scorecard: Qualitative Factors

20

BCA incorporates qualitative factors and is assigned by Rating Committee based on range.

Example Scorecard Continued: Example Scorecard Continued:

Qualitative factors

quantified within scorecard



Support and Structural Analysis 3


Support and structural analysis consists of three components.

Support & Structural Analysis

22

» How likely is a bank

to be supported by

affiliates?

» Determines the

Adjusted BCA

» The risk that different

creditors are exposed

to in the event of the

failure of a bank,

absent government

support

» This enables us to

distinguish between

the BCA, bank senior

unsecured, bank

holding company

senior unsecured, and

deposits

» The extent to which

risks to creditors

are mitigated by

public support



Our approach to assessing Affiliate Support.

Affiliate Support

23

Variables are as follows:

Probability of Default (PD) = (1- Support Probability) * BCA + Support Probability * ((Dependence

* min (BCA, Creditworthiness) + (1 - Dependence ) * BCA * Creditworthiness)

Unsupported

rating (BCA) Creditworthiness

Support

probability

Dependence

(correlation) 1 2 3 4

These will determine a range of potential uplift under our Joint-Default Approach (JDA)



Assumptions

Country of supporting affiliate Country XYZ

Supporting Affiliate Parent Bank Inc

Reference creditworthiness BCA

Creditworthiness of support provider baa1

Dependence Very High22 33 34 36

BCA Level of support

Notching

guidance (Min - Mid - Max)

Assigned

notching

Assigned

Adjusted BCA

ba1 High 1 - 1 - 2 1 baa3

Issuer Affiliate Support

24

Affiliate Support is assessed, uplift estimated using JDA and assigned by Rating Committee.

Adjusted Baseline Credit Assessment



European Union, Norway, Liechtenstein,

Switzerland, United States (Title I and Title II),

Others (esp. G-20) likely to follow

Advanced LGF

Liability-side analysis

» Specific legislation enabling orderly resolution

of failed bank

» Clear understanding of impact on depositors

and other creditors

» Reduced likelihood of support for

senior creditors

YES

WHERE:

Loss Given Failure analysis

Operational Resolution Regime?

Basic LGF

Notching based on instrument type

Senior @ BCA, Subordinated @ BCA-1, etc

Everywhere else for now

» Expectation that the largest, most

systemically important banks are typically

resolved through support rather than bail-in

» Statutory alternative is bankruptcy, but

resolution approaches tend to be defined

only in a crisis

NO

Choice of approach depending on type of resolution regime

25

WHERE:



Advanced Loss Given Failure Analysis

26

Banks in operational resolution regimes will be subject to Advanced LGF analysis



Determination of Loss Rate

27

We combine our Macro Profile and the resolution approach to determine the loss rate.

US Title II Bank: Single Point of Entry

resolution framework preserves franchise

value and reduces losses

Resolution Approach Examples:

US Title I Bank: Higher losses than a

Title II bank given receivership-based

approach

Loss Rate

8% of tangible

banking assets

13% of tangible

banking assets

EU bank with ‘very strong’, ‘strong ‘or

‘moderate’ Macro Profiles―losses

expected to be contained

EU bank with ‘weak’ or ‘very weak’ Macro

Profiles―losses expected to be greater

due to higher stress on assets in failure



Determination of Liability Structure

28

We construct a view of the bank’s balance sheet in failure and identify affected

debt and deposits.

We divide the consolidated group into

sub-groups according to their jurisdictions,

allowing for the possibility some entities

might be resolved separately from the rest

of the group.

Looking at the isolated balance

sheet, we construct the hierarchy of

debt and deposits under resolution. 1 2

Preferred

Deposits

Preferred

Deposits

Country A Country B

Senior

Junior

Deposits

Sub-debt

Senior

Sub-debt

Junior

Deposits

Example:

HIG

HE

R R

ISK

Example:

Country C

Non-operational

Resolution

Regime

Country A

resolution

perimeter

Country B

resolution

perimeter

Country A

Country A

Country B

Country B



LGF Waterfall (1)

29

Once the loss rate and balance sheet are established, each instrument class can be

assessed for its relative risk and then notched up – or down – from the Adjusted BCA.

Preferred

Deposits

HIG

HE

R R

ISK

Sub Debt

Preferred

Deposits

Failure Balance Sheet Established under liquidation principles

% of tangible banking assets

2%

12%

83%

Se

nio

r

Un

se

cu

red

Ju

nio

r

Dep

os

its

Equity 3%

>= 0 <6 % >= 6 <8 % >= 8 <10 % >= 10 <12 % >= 12 <14 % >= 14 <16 % >= 16 %

>= 0 <6 % -1 -1 0 0 1 1 2

>= 6 <8 % na 0 0 1 1 2 2

>= 8 <10 % na na 1 1 2 2 3

>= 10 <12 % na na na 2 2 3 3

>= 12 % na na na na 3 3 3

Volume and subordination % Tangible Banking Assets

Su

bo

rdin

ati

on

% T

an

gib

le

Ba

nk

ing

As

se

ts



Example:

EU’s Bank Recovery and Resolution

Directive (BRRD)

LGF Waterfall (2)

30

Where appropriate, we construct two waterfalls and weight them accordingly.

Sub Debt

Preferred

Deposits and

other

liabilities

Sub Debt

Preferred

Deposits and

other

liabilities

Junior

Deposits

De Jure: order established under

liquidation principles

De Facto: discretionary order, i.e.

full deposit preference

2%

12%

83%

Senior

Unsecured

HIG

HE

R R

ISK

Se

nio

r

Un

se

cu

red

Ju

nio

r

Dep

os

its

» De Jure: The BRRD establishes a

hierarchy of claims under liquidation,

with some – but not all – deposits

preferred to senior unsecured debt.

» De Facto: However the BRRD also

allows authorities to exclude certain

liabilities from bail-in. We believe this

discretion is most likely to be applied

to junior deposits (non–eligible

deposits) – effectively introducing full

deposit preference.

» We weight the expected loss (EL)

under each outcome by the estimated

probability of each scenario.

PROBABILITY 75% 25%

Equity Equity 3%

2%

83%

3%

6.5%

5.5%



Typical waterfall by region

31

* European Union, Norway, Liechtenstein

HIG

HE

R R

ISK

Our liability ranking assumptions vary with relevant legislation and preference in resolution



De jure: 17% volume &

subordination

5% subordination

+2

Example of how the two scenarios are weighted to determine the appropriate uplift.

Probability-weighted Advanced LGF outcome

32

Loss Rate: Low

8% of tangible

banking assets

>=0 <6% >= 6 <8 % >= 8 <10 % >= 10 <12 % >= 12 <14 % >= 14 <16 % >= 16 %

>= 0 <6 % -1 -1 0 0 1 1 2

>= 6 <8 % 0 0 1 1 2 2

>= 8 <10 % 1 1 2 2 3

>= 10 <12 % 2 2 3 3

>= 12% 3 3 3 S

ub

ord

inati

on

/ T

an

gib

le

Ban

kin

g A

ssets

(%

)

Instrument volume and subordination / Tangible Banking Assets (%)

De facto: 17% volume and

subordination

10.5% subordination

+3

+ 2 notches 75% de jure

25% de facto

JUNIOR DEPOSITS SENIOR UNSECURED Example bank:

De jure: 17% volume &

subordination

5% subordination

De facto: 10.5% volume and

subordination

5% subordination

+2 0

+ 1 notch

Adj. BCA: baa3 baa1 baa2

de jure

de facto



Example Advanced LGF Analysis

33

Bank in an Operational Resolution Regime

Adjusted BCA: baa3

» “LGF notching” captures loss severity

» “Additional notching” captures coupon-related issues affecting timeliness of payment


Instrument class De jure De factoAssigned LGF

notching

Additional

notching

Total Instrument

Notching

Preliminary

Rating

Assessment

Counterparty Risk Assessment (CRA) 3 3 3 0 3 a3 (cr)

Deposits 2 3 2 0 2 baa1

Bank senior unsecured long-term debt 2 0 1 0 1 baa2

Holding company senior unsecured long-term debt -1 -1 -1 0 -1 ba1

Bank dated subordinated debt -1 -1 -1 0 -1 ba1

Bank non-cumulative preference shares -1 -1 -1 -2 -3 ba3

LGF Notching


Example Basic LGF Analysis

34

Bank in an Non-Operational Resolution Regime

Adjusted BCA: baa3

» “LGF notching” captures loss severity

» “Additional notching” captures coupon-related issues affecting timeliness of payment


Instrument class De jure De factoAssigned LGF

notching

Additional

notching

Total Instrument

Notching

Preliminary

Rating

Assessment

Counterparty Risk Assessment (CRA) na na 1 0 1 baa2 (cr)

Deposits na na 0 0 0 baa3

Bank senior unsecured long-term debt na na 0 0 0 baa3

Holding company senior unsecured long-term debt na na -1 0 -1 ba1

Bank dated subordinated debt na na -1 0 -1 ba1

Bank non-cumulative preference shares na na -1 -2 -3 ba3

LGF Notching


Preliminary

Rating

Assessment

Sovereign

Rating

Probability

of Support Dependence

JDA

Range

Credit

Rating

Junior

Deposits baa1 (+2)

Aaa

Moderate

Very High

+1 to +1 A2 (+1)

Moderate +1 to +1 Baa1 (+1) Senior

Unsecured baa2 (+1)

Subordinated

Debt ba1 (-1) Low +0 to +1 Ba1 (+0)

Government Support

Government support is assessed for each creditor class and uplift derived using JDA.

Example Bank:

We will use sovereign

rating rather than

systemic support

indicators (SSI)

95-100%

70-94% Very High

50-69% High

30-49% Moderate

0-29% Low

Notching within the

JDA range is a

Rating Committee

judgment

90% Very High

70% High

50% Moderate

Adj. BCA: baa3

Government

Backed

35



Assumptions

Supporting authority Country XYZ

Creditworthiness of support provider Aa2

Dependence Very High

Local Currency bank deposit ceiling Aaa

Local Currency country ceiling Aaa

Foreign Currency bank deposit ceiling Aaa

Foreign Currency country ceiling Aaa

19 22 33 94 98 99 102 103

Instrument class

Preliminary Rating

Assessment

Level of

support

Notching

guidance (Min - Mid - Max)

Assigned

notching vs

PRA

LC Country

ceiling

impact

Assigned LC

rating

FC Country

ceiling

impact

Assigned FC

rating

Counterparty Risk Assessment (CRA) a3 (cr) Moderate 1 - 1 - 1 1 0 A2 (cr) -- --

Deposits baa1 Moderate 1 - 1 - 1 1 0 A3 0 A3

Bank senior unsecured long-term debt baa2 Moderate 1 - 1 - 1 1 0 Baa1 0 Baa1

Holding company senior unsecured

long-term debtba1 Low 0 - 0 - 1 0 0 Ba1 0 Ba1

Bank dated subordinated debt ba1 Low 0 - 0 - 1 0 0 Ba1 0 Ba1

Bank non-cumulative preference

sharesba2 Low 0 - 0 - 1 0 0 Ba2 (hyb) 0 Ba2 (hyb)

Example of Government Support

36

Government Support is assigned, usually within a range derived from Joint-Default Analysis

Assigned Instrument Ratings



Banking Group ABC Inc

Macro Profile

Standalone assessment 112

Baseline Credit Assessment

Affiliate Support uplift

Adjusted Baseline Credit Assessment104 60 105 106 107 108 109 110 111

Long-term Outlook Short-term Long-term Outlook Short-term

Counterparty Risk Assessment (CRA) 3 a3 (cr) 1 A2 (cr) -- Prime-1 (cr) -- -- --

Deposits 2 baa1 1 A3 Stable Prime-2 A3 Stable Prime-2

Bank senior unsecured long-term debt 1 baa2 1 Baa1 Stable Prime-2 Baa1 Stable Prime-2

Holding company senior unsecured long-term debt -1 ba1 0 Ba1 Ba1

Bank dated subordinated debt -1 ba1 0 Ba1 Ba1

Bank non-cumulative preference shares -2 ba2 0 Ba2 (hyb) Ba2 (hyb)

Foreign Currency ratings

Country XYZ

Strong +

ba1

1

baa3

Debt class

Instrument

notching

Preliminary

Rating

Assessment

Government

Support

Notching

Local Currency ratings

Example Credit Ratings Summary

37

Credit Ratings

Ratings construct summarised



Moody’s Bank Rating Universe

38


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